Why S2G and Obvious Ventures Invested in Good Eggs as Food E-Commerce Startup Funding Falls 22% YoY

Good Eggs, the San Francisco-based food delivery service that last year shocked consumers by having to shut down all operations outside of the Bay Area, has surprised the market again by raising $15 million in fresh funding. The company’s new investors — food-focused S2G Ventures and Obvious Ventures — added to the surprise.

The announcement comes as investment in food e-commerce startups that are hoping to disrupt the grocery sector — e-grocers, meal kit delivery services, and bespoke meal delivery — fell 22% year-over-year and 41% compared to the second half of 2015, according to AgFunder’s Mid-Year  2016 agtech investment report.

The pullback was largely expected as the heated sector raised over $1.5 billion last year — that doesn’t even include restaurant delivery services — but coincided with an increasing number of failures globally. Good Eggs was largely seen as one of these failed startups that had struggled with logistics costs and unit economics after it shuttered operations in Los Angeles, Brooklyn, and New Orleans after expanding too quickly.

“It was, and is, complicated, way more complicated than we ever anticipated,” said co-founder and then-CEO Rob Spiro at the time. At this point, Good Eggs had raised $31.5 million in venture funding from investors including Collaborative Fund, Correlation Ventures, Sequoia Capital and Index Ventures.

Good Eggs makes good changes

The pullback preceded some changes at the company, such as next-day delivery — on-demand delivery is a feature Farmigo CEO Benzi Ronen says is increasingly important for consumers — and a new iOS app. The company also brought on Bentley Hall to take over the CEO position in December as Spiro became chairman. Hall has held a range of jobs in food and retail including chief operating officer and chief financial officer at Plum Organics, the organic baby, toddler & kids food brand.

According to Obvious Ventures’ Vishal Vasishth, Hall’s appointment has gone a long way to getting the company back on track and has involved turning Good Eggs into a hyper-convenient, full stack online grocery store. “Bentley’s background is in food business rather than technology, so he understands the economics of a food business,” said Vasishth, adding that his partners had worked with Hall as investors in Plum Organics.

In a recent post on the company’s blog, Hall emphasized the importance of following business basics.

“[When I joined as CEO] I was shocked by how they, like so many early stage startups, had ignored the importance of coupling passion with business basics. Improving margins and watching overhead aren’t sexy. They don’t make for great cocktail conversation, but they are the foundational necessities needed to create lasting change,” wrote Hall.

“However, I was deeply inspired by the company’s mission to grow and sustain local food systems and the team’s persistent ambition to transform an established industry,” he added.

Grocery disruption appeal

This passion to transform and disrupt the grocery industry is what attracted both S2G Ventures and Obvious Ventures.

Obvious Ventures, which invests across three themes — sustainable systems, people power, and healthy living — invests in food and ag startups it believes are helping to “reimagine the food system.” Good Eggs fits into this thesis as it is ‘reimagining grocery’ with the potential of personalizing grocery shopping to individuals, Vasishth told AgFunderNews. The firm looked at several companies in the sector before investing in Good Eggs.

S2G Ventures, which focuses on food and agriculture technology startups only, sees Good Eggs as a de-centralization play and an alternative retail model as it provides a channel between consumers and local growers. It also fits with the firm’s theses around sustainability and healthy eating. The venture firm had been looking at investing in Good Eggs for several years before making this deal.

“What I like about Good Eggs is their differentiation in the market, which is predominately local food, the customization of their two-sided network model for each market they are in, their focus on operational efficiency and the long-term lifetime value of their customer,” said Chuck Templeton, co-founder at S2G and lead on the deal.

Obvious Ventures’ Vasishth is not fazed by the backdrop of failing food e-commerce startups around him while admitting that there will be heavy consolidation in the coming months. The winners, he argues, will be those that are disciplined around unit economics — the costs of acquiring and keeping customers versus their lifetime value as a customer. “Grocery is a very large category, consumers go every week, but without discipline around unit economics, there’s no business to be built here,” he said.

Technology in food

Success in food e-commerce is also about properly matching technology to a food business, and not the other way around, he added. This reflects what Farmigo CEO Benzi Ronen told AgFunderNews after he was forced to shut down the startup’s food delivery business to focus on the software platform. Ronen argued that his skills, and those of his partner, were in software, and that’s where they could build value in a business, not in fresh food logistics.

Vasishth agrees that the technology portion needs to be approached from another angle; a food angle.

“You need a combination of understanding food businesses and how technology can help, versus thinking about it as a technology business that happens to be in food,” said Vasishth. “You need to understand food and how grocery runs and the dynamics and margins of that.”

Good Eggs is busily innovating around the technology of its platform, with a solid focus on serving customers better, and personalizing the service to them. It needs to learn how to make consumers’ lives easier while having discipline, and not just growth for growth’s sake, which is where it went wrong in the past, he added.

“Good Eggs has established a great brand; if you talk to folks in the Bay Area, customers love the service,” said Vasishth. But they did a classic mistake and didn’t focus on the consumer by understanding what products they needed and then didn’t have the business discipline of unit economics so tried to grow really fast without thinking of those things.”

While no details were given around the valuation of Good Eggs in this round, it is understood to be a down round on its $21 million Series B.

Not all existing investors participated in the round, but it was led by Index Ventures, an investor in the company since the 2014 Series B, and Collaborative Fund also invested. Other investors in the round were Chicago investment firm DNS Capital, and impact investment firm Uprising.

What do you think about food delivery startups? Do they stand to disrupt the grocery sector and how many can survive? Email [email protected].